The COVID-19 economy: Reopening, relapse, recovery

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- Beata, let's start with the big picture. The US has started to open to varying degrees. Now many states are reversing their reopening plans. What would you say is the state of the economy and state of recovery in the United States?

- Well, certainly, when we look at data that we were getting from May and June, we saw really strong bounce backs. And it was fairly broad. We saw manufacturing sector cross into expansion territory about a month earlier than we were expecting. So that's a positive. We saw service activity coming back. It's nowhere near the levels it was, but it was certainly moving in the right direction. And then we had two back to back strong job reports, the most recent being almost five million jobs. Now, that still leaves a 14 million deficit of people unemployed relative to pre-COVID. But at least everything was moving in the right direction.

But as you mentioned, there is now a pause being hit on reopening activity. Some states are doing some rollback, but not as much as you would expect. So I think if you think back to the months of March and April, where everybody was just kind of locked down and encouraged to stay home, what we're actually seeing is some tweaking on the edges. For example, in Texas, where they had in-restaurant capacity at 75%, it got scaled back to 50%. So it's still more than we would have had in March and April.

But we do think that probably the peak in terms of momentum and popping up of growth is likely already in the rearview mirror, that we're going to see momentum, even though it can continue to gain, at a much slower pace as we go forward.

- One of those pops-- and you mentioned it in terms of the jobs data that came out, that 4.8 million jobs that just came out, higher than expected. What does that number tell you, or the composition of that number tell you? I know I heard one commentator say, hey, if we see the unemployment rate get below 10%, that's a full blown recovery. I mean, what do you think of that?

- Yeah, the unemployment rate sitting just at around 11% right now. And it improved by two points, which was faster than many had anticipated. But about 60% of the jobs created in June were in two sectors, leisure and retail.

Now, those are also the two sectors that lost substantial amounts of jobs. So you're seeing some gains occur where the losses are pronounced. However, that's also the area that is now getting put back into a holding pattern. So it's unlikely we're going to continue to see these inroads made.

If you take New York, for example, they've done a tremendous job bending their COVID curve and doing containment. They were going to move to stage three, which would have allowed in-room dining, I guess, for restaurants. And they've put that on pause, not because of their COVID curves but because what they're seeing in Florida, Texas, and California. And so all those jobs now remain in a holding pattern. That's pretty substantial for that state. And so that's why we're saying that the biggest job gainings are-- we're not likely going to see these type of movements.

We also know that to be true, because when you look at the amount of people still filing for unemployment insurance, it's very elevated compared to history. And those coming off of uninsurance claims-- so now they've been recalled back to work. We saw a very big move initially. And now it's tapered off.

So in the last four weeks, we have not been seeing people coming off unemployment like we did in the first couple of weeks. So we definitely can get a sense that momentum is slowing.

- You recently were speaking with a group of people. And you talked about the four stages of the economic cycle-- protect, recover, strengthen, and function. Where are we? Which one?

- Recovery is where you start to get some range of mobility. You're definitely not, on a sustained basis, able to engage in the same activities. But you're building out capacity. And that's where the economy is now.

And we do think that that recover stage is not a short stage, because we actually need a vaccine or really good strong treatments to reduce mortality rates and risks within the population. And that's likely a 2021 story.

- What about the Fed? They've said they're going to keep rates close to zero until 2022. They're very active in the market right now in terms of buying. You talked about bending the COVID curve. They're looking at bending the yield curve, I think, on some things.

So how involved do you see them being? Although I should add I think it was Chairman Powell who talked about-- the Fed can't solve a health crisis. But they're doing their best to solve the other stuff.

- Yeah. What they can do is certainly maintain as much confidence as possible under risk sentiment and the financial markets themselves. But to your point, that there's just plain limitations. And this is why Jay Powell has actually been quite vocal in being a proponent of fiscal spending in the US and making sure that they don't peel back these programs too early.

An example would be, they have the top up of their unemployment insurance. They gave an extra $600 to individuals unemployed. That expires at the end of July. So if that expires and you still have this very slow recovery in the most impacted, low income segments of the job market, you now move from a supply side shock into a demand side shock-- meaning the income supports aren't there. People's precautionary savings go up. Behaviors change. And that takes a lot longer to dig out of than at least maintaining the income support.

So when the economy is able to reopen, you immediately engage these folks, which is exactly what we've been seeing, actually, all through May and June. The strongest increases in spending in terms of returning spending patterns back to where they were pre-crisis is actually occurring in the low income segment of the population, not the high income. High income individuals can afford to stay home, not go to the restaurants, and not go out. They're putting their money into recreation vehicles and pools and other areas. So we're actually not seeing higher income people create the job multiplier effect that traditionally comes from going out and spending. But we are still seeing it come from the low income segment.

- Interesting. You brought a chart here that takes a look at US real GDP growth. The title of it is "Near-Term Outlook a Bit Brighter." Tell me what's interesting about this one.

- Yeah, so the scale of that graph is quite large. So you could see that we have done upward revisions to our second quarter data. However, when you go from a minus 40% into the minus 30, it's all a matter of perspective, I guess. But it is an improvement.

So I think what ultimately happened is we had so many markdowns of the data occurring, because we were seeing these historical losses occurring in every segment of the economy. And now we got some of the reopenings happening earlier than anticipated in the US, which is part of the problem. But at the same time, it generated a little bit more activity than we were expecting. So you're seeing some upward revisions.

However, as you go further out in the forecast, we've actually downgraded into 2021, because of the slow recoveries that we think will have these starts and stops happening as we go forward. So just because there's a little bit more momentum in the near-term doesn't change the narrative for the medium term that, ultimately, we can't really engage in a full recovery with restaurants opening at full capacity, amusement parks, recreation areas, until we can get into a reasonable comfort level with health outcomes.

- Let's pivot and talk about Canada. Canada, like every country, has been hit very hard by the lockdown. I'd like to get your assessment on what you see is happening here, and if we could run through a few different variables, if you were.

The first one is jobs. I think two million Canadians lost their jobs. And you've got a chart showing what's been happening in individual provinces.

- Yeah, so basically we've seen every province start to show a recovery as of the May data in jobs, except for Ontario. And that is directly related to the speed at which reopening is occurring. So Ontario was last to reopen segments of its economy. In fact, Toronto was the very last of the regions. So when we do get the June employment data, it's not likely going to be as high as one might think, because Toronto still hadn't reopened in the period that that survey occurred, in terms of hiring.

Toronto makes up 45% of the job market for Ontario. So if you don't engage Toronto, it's very difficult to get a broad recovery across the province. So Ontario is likely going to remain a bit of a laggard, at least for one more month. And then we'll see some recovery really in terms of momentum start to pick up from there.

But in May, Quebec was a huge leader. They accounted for 80%-- one province, 80% of the jobs that were created. That's almost four times their weight in the economy. And that's because they went from that stop to start position. They had taken harsher measures, like shutting down construction and manufacturing, that Ontario didn't. So when they turned on the pipes again, everything kind of flowed all at once. And so you saw a really nice recovery there.

In fact, areas like educational services are almost back at their pre-crisis levels. So they're seeing a nice snap back.

- Let me run through rapid fire and a few more. Housing demand. What are you hearing and what do you see?

- Well, Canadians love their housing. And that came through very strongly in the month of May with a resurgence in activity and carrying through. We think it'll likely be reflected again in June.

However, this is the world of big numbers, like we saw with the GDP graph. And so you sit there and you see 40%, 50%, 60% declines in March and April. So even though we've seen, again, big snap backs happen in May, we're still in a deficit position for sales relative to pre-COVID levels. And we don't think that'll recover yet. That's going to also be a bit more of a belabored recovery.

Ultimately, that's a market that's going to be determined by two key fundamentals. One, where do jobs go. And two, immigration. And that's an important one. We have seen immigration levels really collapse over the spring. And we don't think those are going to get back to their pre-COVID levels this year either. And so there's two weak demand forces hitting that market simultaneously.

- The dollar. We see that move, obviously, a nice proxy-- or I should say moves in tandem with oil. What is happening? And what do you see?

- Yeah, so the dollar is always-- it's had a bit of a struggle. Many economists would say, what's the fair market value of the currency? It's somewhere between $0.78 and $0.80. We haven't been there in years.

So it's sitting-- it's bouncing around $0.73 to $0.74, well off the bottom that we saw in March, which is good. But if you think about-- if you break down what drives the dollar, one is often the spread differential with the US. Is it attractive to pull investment into the country? We're not going to see much differentiation between us and the US. And certainly the Bank of Canada will not be raising rates before the US. So that becomes pretty neutral in terms of influencing the direction of the Canadian dollar.

The other one, as you mentioned, is oil. That should get better in terms of, we've seen supply cuts. And we should have a better demand environment next year. But that's next year. So there could be some upward pull on the currency next year.

And then the other one, which is quite material, is risk. So Canada is not a country that money flows into when international risk is really high like it is today. That, too, should get better next year. So there could be two net positive forces coming through on the dollar next year. But again, even when that occurs, we still think it will be restrained somewhere between $0.75, $0.76, maybe get to $0.77 on a good day. But ultimately, we're not looking at robust economic growth. We're looking at exports still struggling with the environment that we're in. So there's still quite a few weights on it.

So maybe a little bit of improvement next year, but we're not looking for any kind of normalization of the currency.

- Great insight, as always, Beata. And we covered a lot of ground. Thanks so much for joining us.

- My pleasure.

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